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Arguments Against.—(1) Advertising in trade journals does not normally compete to any great extent with tax-paying corporations, publishing commercial magazines because it is usually of a technical nature, and attracts the attention only of those people interested in the professional aspects of the publication.

(2) This bill ignores the fact that it is difficult to separate technical comment (such as where technical benefits of a pharmaceutical product is described in an advertisement in a medical journal) from pure advertising.

(3) Many trade organizations depend on advertising income heavily, and the taxing of that income will seriously hamper their exempt endeavors.

C. CHARITABLE CONTRIBUTIONS

1. 50 Percent Charitable Limitation Deduction

Present law. Under present law, the charitable contributions deductions allowed individuals generally is limited to 30 percent of a taxpayer's adjusted gross income. In the case of gifts to certain private foundations, however, the deduction is limited to 20 percent of a taxpayer's adjusted gross income. (In addition, in limited circumstances, a taxpayer is allowed an unlimited charitable contributions deduction.)

Problem. It has been suggested that it would be desirable to strengthen the incentive for charitable giving by increasing the present 30 percent limitation on the charitable contribution to 50 percent of a taxpayer's income. Moreover, it was hoped that this increase would offset any decreased incentive resulting from the repeal of the unlimited charitable contributions deduction (see page 32). In addition, the combination of these two actions means that charity (on a taxfree basis) can remain an equal partner with respect to an individual's income but cannot reduce an individual's tax base by more than onehalf.

House solution.-The House bill increases the general 30 percent limitation on an individual's charitable contribution deduction to 50 percent. The 20 percent charitable contribution deduction limitation in the case of gifts to private foundations is not increased by the bill. Also, contributions of appreciated property would continue to be subject to the present 30 percent limitation. These changes apply to taxable years beginning after 1969.

Arguments For.-(1) It is more appropriate to have a general limitation of 50 percent with no unlimited charitable contribution deduction so that all taxpayers may be treated equally with respect to charitable giving.

(2) Limiting the additional contribution deduction to cases where no appreciation is involved will prevent any further increase in advantages arising from the omission of income given to charity from an individual's tax base.

Arguments Against.—(1) This provision benefits a particular class of taxpayers who already are able to take advantage of tax privileges that are not available to lower income taxpayers.

(2) The justification for increasing the limit was to provide a greater incentive to offiset the disincentive resulting from a series of

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restrictive charitable contribution suggestions which were rejected by the House. Since the bill does not contain these restrictions this "compensation" is unwarranted.

(3) From the standpoint of the educational institutions and public charities the increase to 50 percent in terms of total contributions they receive will not result in the very large contributions they could solicit under the unlimited charitable contribution deduction.

(4) Failing to make the additional contribution deduction available in the case of property which has appreciated in value will minimize the value of this additional deduction.

2. Repeal of the Unlimited Deduction

Present law. The charitable contributions deduction for individuals generally is limited to 30 percent of the taxpayer's adjusted gross income. An exception to the 30 percent general limitation allows a taxpayer an unlimited charitable contributions deduction, if in 8 out of the 10 preceding taxable years the total of the taxpayer's charitable contributions plus income taxes paid exceeded 90 percent of his taxable income.

Problem.-It has been pointed out that the unlimited charitable contributions deduction has permitted a number of high-income persons to pay little or no tax on their income. It appears that the charitable contributions deduction is one of the two most important itemized deductions used by high-income persons, who pay little or no income tax, to reduce their tax liability.

House solution.-The unlimited charitable contributions deduction is to be eliminated for years beginning after 1974. During the interim period, an increasing limitation is to be placed on the amount by which the deduction can reduce the individual's taxable income. For taxable years beginning in 1970, the unlimited deduction is not to be allowed to reduce a person's taxable income in this manner to less than 20 percent of his adjusted gross income. This percentage is to be increased by 6 percentage points a year for the years 1971 through 1974. The bill also provides that the percentage of the taxpayer's income which must be given to charity or paid in income taxes each year in order to qualify for the unlimited deduction during this interim period is to be reduced to 80 percent in 1970, and is then to be reduced by 6 percentage points a year for the years 1971 through 1974.

Arguments For.-(1) It is not equitable to allow certain highincome persons to pay little or no income tax by means of the unlimited charitable contributions deduction, while most taxpayers are presently limited to a maximum charitable deduction of 30 percent of income each year (with a 5-year carryover of contributions in excess of 30 percent). Further, the qualification requirement for an unlimited deduction is related not to total economic income but only to "taxable" income, and some taxpayers have sufficient tax-free income and/or other deductions so that they may qualify and yet not actually have given up most of their economic income.

(2) Charitable contributions should not be allowed to reduce an individual's tax base by more than one-half. Thus, the repeal of the unlimited charitable deduction, combined with an increase in the gen eral limitation from 30 percent of adjusted gross income to 50 percent

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means that charity can remain an equal partner (but no more) with respect to an individual's income.

(3) This provision closes a "loophole" that has allowed a small number of high-income persons to pay little or no tax on their incomes which sometimes exceed $1 million a year.

(4) Because of the possibility of contributing highly appreciated property to charity for which the unlimited charitable contribution deduction is claimed, a high income taxpayer can contribute an amount sufficient to offset his income and place himself in a more favorable after-tax situation than if he had not made the charitable contribution; thus, the tax shelter is of greater benefit to the donor than the contribution is to charity. It is this tax-planning which motivates the gift-and not a desire to benefit charity.

Arguments Against.—(1) The relatively small gain in tax revenue ($25 million a year) would result in a large direct loss to philanthropic endeavors.

(2) The bill fails to recognize that persons who make a significant long-run commitment of a very large part of their income make a contribution to charitable activities that would be difficult to replace. 3. Charitable Contributions of Appreciated Property

Present law. A taxpayer who contributes property which has appreciated in value to charity generally is allowed a charitable contributions deduction for the fair market value of the property at the time of contribution. Further, no income tax is imposed on the appreciation in value of the property at the time of the gift. In addition, if property is sold to a charity at a price below its fair market value a so-called bargain sale the proceeds of the sale are considered to be a return of the cost and are not required to be allocated between the cost basis of the "sale" part of the transaction and the "gift" part of the transaction. The seller is allowed a charitable contributions deduction for the difference between the fair market value of the property and the selling price (often at his cost or other basis).

Problem. The combined effect of not taxing the appreciation in value and at the same time allowing a charitable contributions deduction for the fair market value of the property given is to produce tax benefits significantly greater than those available with respect to cash contributions. The tax saving which results from not taxing the appreciation in the case of gifts of long-term capital assets is the capital gains tax which would have been paid if the asset were sold. In the case of ordinary income type assets, however, this tax saving is at the taxpayer's top marginal tax rate. In either case, the tax saving from not taxing the appreciation in value is combined with the tax saving of the charitable deduction at the taxpayer's top marginal rate. As a result, in some cases it is possible for a taxpayer to realize a greater after-tax profit by making a gift of appreciated property than by selling the property, paying the tax on the gain, and keeping the proceeds.

In addition, in the case of a so-called bargain sale to a charity (often at the taxpayer's cost or other basis), the taxpayer is allowed a charitable deduction for the appreciation in excess of the sales price and no

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tax is paid on this appreciation. In cases where the sales price is equal to the cost basis, the entire appreciation is deductible and escapes

taxation.

House solution.-The bill in the case of certain charitable contributions of appreciated property takes this appreciation into account for tax purposes. This is true of gifts to a private foundation, other than a private operating foundation or one which within 1 year distributes an equivalent amount to, or for the use of, "public" charitable organizations or private operating foundaitons. Also, under the bill, appreciation in value is taken into account in the case of gifts of tangible personal property (such as paintings, art objects, and books), a future interest in property, and property which would give rise to ordinary income if sold. Where the appreciation is taken into account, the taxpayer has the option of reducing his deduction to the amount of his cost or other basis for the property, or taking a charitable deduction for the fair market value of the property but at the same time including the appreciation in value of the property in his income. These provisions relate to gifts of appreciated property made after

1969.

In the case of so-called bargain sales to charities-where a taxpayer sells property to a charitable organization for less than its fair market value (often at its cost basis)—the bill provides that the cost or other basis of the property is to be allocated between the portion of the property "sold" and the portion of the property "given" to the charity on the basis of the fair market value of each portion. This provision applies to sales made after May 26, 1969.

Arguments For.-(1) The charitable contributions deduction was not intended to provide greater or even nearly as great-tax benefits in the case of gifts of property than would be realized if the property were sold. In gifts of appreciated property where the tax saving is so large, little, if any, charitable motivation may remain. In such cases, the Federal Government is almost the sole contributor to the charity.

(2) Concerning the specific types of appreciated property where the House bill requires appreciation to be taken into account for tax purposes, it is maintained that these types of property either result in the maximum tax benefit where the taxpayer is likely to be better off by making the contribution than by retaining the property (i.e., ordinary income property) or are very difficult to value and often result in overvalued claims for deductions (i.e., tangible personal property and future interests in property).

(3) With regard to gifts of appreciated property to private nonoperating foundations, it is thought that there is a high possibility that the property itself (or its equivalent value) will not actually be used for charitable purposes until some distant time in the future. This latter limitation may have the effect of increasing gifts of appreciated property to "public" charities, since those who are primarily interested in the tax benefits presumably would make their gifts of appreciated property to such charities.

(4) This provision partially closes the loophole whereby highbracket taxpayers are able to realize a greater after-tax profit by making a gift of appreciated property to charity than they are by selling it, paying the tax on the gain, and keeping the proceeds.

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(5) Because the donor received the beneficial enjoyment of giving his property to charity, it is appropriate to tax the appreciation in value of the property to him.

(7) The present system of allowing a contribution deduction for the fair market value of property without requiring that the appreciation be included in the donor's income has led to many abuses of the charitable contribution deduction involving gifts of paintings, statuary and similar art objects at artificially inflated prices calculated to produce the maximum tax benefit for the donor. The bill corrects this practice.

Arguments Against.-(1) This type of giving represents a major source of income to private educational institutions and colleges, and if it were eliminated Federal funds would be needed to support these colleges, raising constitutional questions regarding the use of Federal funds because of the traditional separation of Church and State.

(2) The result is much too complex and discriminatory in that gifts of the same type of property may receive different tax treatment, depending on the type of recipient.

(3) It does not appear to be appropriate to differentiate between types of property given to the same charitable organization-properties which may have identical fair market values in the hands of the taxpayer.

(4) Requiring the appreciation in value to be included in the tax base if the fair market value is claimed as a deduction for certain charitable gifts is a significant departure from the accepted practice of not taxing unrealized appreciation as "income."

4. Two-Year Charitable Trust

Present law. Under present law, an individual may establish a trust for two years or more with the income from property placed in the trust being payable to charity. In such a case although the trust instrument provides that after the designated period of time the property is to be returned to him, the income from the trust property is not taxed to the individual. However, the individual does not receive a charitable contributions deduction in such a case.

Problem.-The special two-year charitable trust rule has the effect of permitting charitable contributions deductions in excess of the generally applicable percentage limitations on such deductions. For example with the 50 percent limitation on such deductions contained in the House bill, the maximum deductible contribution that could generally be made each year by an individual who had $100,000 of dividend income (but no other income) would be $50,000. However, if the individual transfered 60 percent of his stock to a trust with directions to pay the annual income ($60,000) to charity for two years and then return the property to him, the taxpayer would exclude the $60,000 from his own income each year. In effect, then, the individual has received a charitable contributions deduction equal to 60 percent of his income.

House solution-The House bill eliminates the rule under which an individual is not taxed on the income from property which he transfers to a trust to pay the income to charity for a period of at least two years. This provision applies to transfers after April 22, 1969.